Markets do need some regulation

November 17, 2011

A recurrent claim of Republican presidential hopefuls in their debates is one familiar to the GOP faithful and a centerpiece of the party's political ideology.

The popular refrain, it seems, is a zealous belief in the virtue of laissez-faire capitalism and the benefits of a free-market economy unrestrained by intrusive government interference.

Within the ranks of the Republican Party there's rarely doubt that government oversight invariably hinders the efficient functioning of the marketplace.

Looking ahead to the expected debate over government economic policy during the 2012 election campaign, the voting public should be alerted that common notions about free-market capitalism are all too often the product of corporate-supported think tanks and become the talking points of conservative politicians and partisan pundits.

It will come as a shocking revelation to deregulation-minded politicians that their most cherished ideas regarding laissez-faire capitalism are fallacious and reflect one of the most enduring myths in our history.

An economic system can only successfully exist within a regulatory framework consisting of rules and boundaries that necessarily restrict the range of free choice.

In the blunt words of prominent international economist Ha-Joon Chang of England's Cambridge University, "The free market doesn't exist."

The following selective illustrations underscore Chang's bold assertion and drive the point home:

For the benefit of society, laws to insure a hazard-free existence from numerous types of pollution must take precedent over unchecked exploitation of the environment. Air and water quality standards, for example, should be properly under the stewardship of government and not left to the often rapacious enterprises engaged in by the private sector.

The same government regulatory oversight must be exercised in the related fields of health, medicine and prescription drugs. In these areas and others, public well-being demands that the safety of such products and services be held to higher standards than those of a solely profit-driven marketplace.

Considering the cost and deadly consequences of recent, nationwide calamities, many thoughtful critics point out the need for more stringent government safeguards, not regulations weakened or fewer in number.

In the past year alone, the country has experienced a broad range of corporate disasters, including the BP oil spill, accidental acceleration of Toyota autos, toxic or contaminated food scares, the Massey coal mine explosion, gas fracking accidents and leaded toys on the market.

Although most economists concede that one should not be for regulation per se, neither should opposition stem from the bias of a reactionary ideology.

Far too often, socially desirable regulation is resisted because of deeply entrenched private sector self-interest. To quote an observation made years ago by economist John Kenneth Galbraith, "If there is a ruling guideline when a specific regulation is under consideration, its advocates should be vigilantly aware of any self-serving pecuniary interest motivating those who are opposed."

With the Great Recession of our own time in mind, it's also noteworthy that Galbraith stressed the dangers of an under-regulated financial system.

"The very nature of Wall Street cultural values," he argued, "with its periodic speculative bubbles, often result in a devastating effect on the economy and American life."

As he emphasized in "The Good Society," "It must be recognized that from few matters has modern society more suffered than from the excesses and errors of what is now called the financial community."

Over the years, economists with markedly different political philosophies have acknowledged that markets cannot exist without legal rules enforceable by government.

No less a champion of free-markets as economist F.A. Hayek remarked in "The Road to Serfdom" that true economic competition requires a legal framework. In Hayek's words, "In no system that could be rationally defended would the state do nothing."

Hayek is remembered as a fierce critic of socialism who believed that the real battle is not between those who favor government intervention and those who don't, but rather how the legal guidelines should be "intelligently designed and continuously adjusted."

Adam Smith, the great moral philosopher and hero of free-marketeers, was exceptionally wise concerning economics and politics. Smith's "Wealth of Nations" has been touted by Republican icons like Ronald Reagan as the bible of unrestrained laissez-faire capitalism.

Interestingly, though, this 18th-century economic theorist, who is often cited as an advocate of unregulated business and small government, was notably skeptical that the so-called "invisible hand" of laissez-faire always promoted the common good.

Although revered by today's conservatives as the ideological father of free-market dogma, Smith reserved some of his most scathing passages in "Wealth of Nations" to condemn the worst consequences of unfettered capitalism and stated that "the government of an exclusive company of merchants is, perhaps, the worst of governments for any country whatever."

With our government in Washington under the firm control of American corporate and financial interests for the last few decades, Adam Smith's astute prophecy appears to have fully materialized.

Compared to the alternatives, properly regulated capitalism is probably the best means of production possible.

As for the free-market ideologues, their perverse misunderstanding of rational capitalism and their reactionary rhetoric only deludes the citizenry.

Even worse, they also undermine legislative reform needed to make the economic system better serve the public interest and create a more equitable society.

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Bruce Dudley lives in Camden, Del. and Paul Smiths, and was born and raised in Saranac Lake